That middle ground between fiscal stimulus and more austerity? More austerity! April 6, 2012

Telling piece by Dan O’Brien in the Irish Times on the report by the Irish Fiscal Advisory Council released this week. Cutting to the chase he argues that:

Yesterday’s report by the new council of wise men [sic – there’s one woman on the IFAC] will fuel the debate between those who advocate doing more to bring the public finances under control and those who believe fiscal tightening is harming recovery.

And:

The council rejected both of the more extreme positions.
At one extreme are the expansionary fiscal contractionists. They say that shock-and-awe austerity measures actually boost growth because consumers and investors believe that swallowing the medicine quickly will bring about rapid recovery.

And…

At the other extreme in the debate are the fiscal stimulators who say things such as “no economy has ever cut its way out of recession” or “austerity is not working because it never works”.

To these O’Brien uses the following rationales. For the more austerity now line:

Yesterday’s report said that “the most authoritative international evidence does not tend to support hypothesis”.
Given how extreme the current period is internationally, one could go a lot further and say that there is really no readily comparable evidence base at all. The cases the expansionary fiscal contractionists cite – including Ireland in the late 1980s – took place against a radically different international backdrop and thus tell us little or nothing about the effects of big budgetary consolidations today.

For the fiscal stimulators…

This position is even easier to dismiss. Last year, the fastest-growing economies in the developed world were the Baltic trio of Estonia, Latvia and Lithuania.
They have undergone more severe fiscal adjustments than Ireland (or indeed Greece for that matter) and are now booming. Their successes show that those who say austerity cannot work are simply wrong.

The odd thing is that the report itself doesn’t reference either of these instances. There’s no mention of Ireland in the 1980s, or of Estonia, Lithuania and Latvia.

Now in fairness O’Brien doesn’t say that the Report does mention them.

Indeed he does write:

Although the folk at the fiscal council did not raise specific examples, they reject the “self-defeating” argument of the fiscal stimulators.

But surely to bring them in as examples and to do so in the context of positing them as exemplers of ‘more extreme positions’ does seem to afford them greater legitimacy in that role than they deserve (and surely if the Baltic’s situation was on some metrics worse than that of Greece then isn’t he undercutting his own argument to some degree depending on how one views the distinction between the terms fiscal consolidation and fiscal adjustment?).

And while this is true of both sides it’s worth noting how O’Brien attempts to portray the IFAC Report as exemplifying some sort of centre ground. Of course it is – if one frames the discussion in the way he does. But a moment’s thought will demonstrate that what he’s effectively doing is saying that more austerity is necessary [or at the least appropriate], just not an ‘extreme’ amount.

But the level of ‘austerity’ being imposed on this society is unprecedented given our own history. And the definitions of ‘more’ and ‘extreme’ seem difficult to determine in that context. And not a thought, or word, given to the impacts of ‘austerity’ on the ground or what x billion more in cuts constitute in that regard.

To be honest what the IFAC report reads like is a redux of their original report, whose finding was essentially ignored by the government. They even say near enough as much.

Based on these considerations, the Council believes that there is still a strong case for favouring an adjustment path that is more ambitious than that outlined in Budget 2012. The Council does not, however, suggest going beyond the additional consolidation amounts set out in the October 2011 Fiscal Assessment Report. In summary, therefore, the Council sees a strong case for a total adjustment effort of the order of €11.4 billion for 2013-15, approximately €2.8 billion above current Government proposals. Simulations indicate that this would entail a General Government deficit of 1.7 per cent of GDP in 2015 (Table 4.1). This is a higher deficit than that suggested by the Council in October (1.0 per cent of GDP), but it is lower than the Government’s current target (2.9 per cent of GDP). The Council’s proposals would imply a sizable primary surplus of approximately 4 per cent of GDP in 2015.

This may sound unfair, but since not one of those on the IFAC is likely to be short a good meal should their proposals be implemented oddly enough said proposals don’t fill me full of confidence.

The decline in net wealth has taken place even though Irish households have reduced their debts more rapidly than any of the other 14 countries. The reduction has occurred because people are paying down debts and because levels of new borrowing have been low since the banking bust.

The study found that households are saving not out of fear for their future prospects, but largely to pay down debt.

This lessens the chances that an increase in consumer confidence could trigger more spending and less saving, thereby fuelling a recovery, as senior Government figures have frequently suggested.

What was that about ‘shock-and-awe austerity measures actually boost growth because consumers and investors believe that swallowing the medicine quickly will bring about rapid recovery.’?

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The last time I looked up the case of the Baltic states, they were still in receipt of EU structural adjustment funds, or whatever the equivalents are called today. That may account for their ability to grow in spite of austere budgets.

Also, when I was in Tallinn about five years ago, I ran into some Irish people who were involved in the estate agent game there, selling Estonian properties to outside buyers – to the point where, they said to me, local Estonians were being priced out of their own housing market. So, is there a property bubble about to burst in the Baltics?

Also, O’Brien must know that Krugman, for injstance, repeaterdly refers to Lativa (Precisely because it’s often hel up as a success) and notes that its output is still way below where it weas when its austerity program started.

There’s also the factor of emigration from the Baltic states since 2004 which would have eased unemployment, social spending etc. There are probably 50,000 plus from the Baltic states living in the Republic at the moment, 10,000 plus living in the North and several hundred thousand living in Britain and possible a couple of hundred thousand spread across the rest of Europe. Total combined population of three Baltic countries is about 6.6 million so it’s likely that between 7-10% have left during the austerity regime there. Not a good advertisement for the ‘success’ of austerity. The few Lithuanians I know are never going back despite the ‘boom’ there. If similar levels of emigration were to contribute to the ‘success’ of austerity policies here we’d be looking at at least 300,000 leaving over the next few years. Although that’ll probably happen anyway. Some ‘success’!

Also interesting to see in today’s Irish Times that Irish household ‘wealth’ has dropped from 3rd to 7th in European terms, where wealth is measured as ratio of assets to liabilities.
And the ‘wealthiest’ households in Europe? Er, that would be Spain. Yes, Spain of the 25% unemployment rate. They had a property bubble too and prices have been slower to fall than in Ireland. So basically these figures tell us nothing about actual prosperity but everything about the folly of equating big property borrowing with prosperity.
That doesn’t stop Dan O’Brien from summarising: ‘the good news in the survey is that Irish households collectively have not been impoverished by the crash’.

How does mainstream economics get away with this? Even if Kirman (1989) and Coase (1994) and are right that
professional economists have long stopped caring about the truth-status of their wares, does the world not notice their grand failure?

Apart from the internalised rituals of convoluted intellectual dishonesty that is the price of entering the clique and getting that ‘competatively-renumerated’ rotating series of jobs between investment banks and goverments, he notes there is a second reason:

…contemporary economic reality and mainstream economics will remain strangers who reinforce each other’s dominance as long as (a) mainstream economics remains, courtesy of its meta-axioms, innocent of the logic of capitalism and (b) the logic of contemporary capitalism spreads faster and
deeper when economics’ meta-axioms help it remain invisible.

Quite possibly, never before has intellectual history fashioned an ideological triumph of this magnitude out of a sequence of sorry, yet powerfully motivated, theoretical failures.